A cap on how big a mortgage homeowners can take on against their salaries should be considered to prevent a new housing bubble, Lord Heseltine has suggested.

The Tory peer and business guru sounded a warning on the effect rising interest rates will have on those who have borrowed too much, as he said the Bank of England should weigh up measures such as a lending cap.

Homeowners borrowing 5.5 times their salary could create major risks when rates rise, the former deputy prime minister told BBC Radio 4's The World This Weekend.

Boom time: London house prices are racing ahead, with the Land Registry showing homes up 14%

He said: ‘If you take into account the inevitable increase in interest rates that is going to come sometime in the medium if not early future then that is a dangerous situation.’

High mortgage to income multiples were 'not sensible', he said, and it could be seen as 'part of the initial housing bubble crisis when one saw the ratios begin to creep up and up'.

Official house price figures released by the ONS last week showed property values rising at 6.8 per cent annually – more than five times as fast as the ONS wages measure, which is up by 1.4 per cent.

In the year to January, the average home went up £17,000 to £254,000, while wages rose by just £417.

Separate figures from the Land Registry on Friday showed house prices across England and Wales rose by 5.3 per cent in the year to February but prices in London soared by 13.8 per cent.

Asked about a cap on how much people could borrow, Mr Heseltine said: ‘Certainly they should look at it, they should look at anything that can try to help even out the rebalancing of the economy, as long as it does not frustrate the rebalancing itself.

‘You have got to be very concerned that the best of intentions don't create a panoply of activity that chokes off the very energy and enthusiasm you are trying to encourage. But, yes, let them look at it.’

Growth: The biggest rises are unsurprisingly in and around London, according to the Land Registry

A Bank of England report this week revealed it will test how a house price crash and a sudden rise in interest rates would hit Britain’s banks, as the Treasury’s chief watchdog has warned of a potential property bubble.

A planned stress test on bank’s ability to deal with a property collapse was highlighted in the latest Financial Policy Committee statement.

The details arrived on the heels of Robert Chote, the head of the Office of Budget Responsibility, sounding a warning to a Treasury select committee on the overheating property market in some areas, while and one of his counterparts said house prices and wages were out of kilter.

Economist Steve Nickell, who works at the OBR with Mr Chote, said: ‘The house price to income ratio has been growing for the last 40 years but that cannot go on forever because everything you consume would become housing and there would be nothing else left.’

Soaring: Official figures show the price of the average UK home hit £254,000 in January - a rise of 6.8 per cent in a year